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The Potential Effects of WTO on Structural Change in Dairy Policy and Industry Structure

The Potential Effects of WTO on Structural Change in Dairy Policy and Industry Structure. James F. Oehmke Al Mussel Christopher A. Wolf November 15-16, 2007 Holiday Inn Capitol/American Farm Bureau Federation Washington, DC. Issue. Issue: Recent changes in trade patterns

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The Potential Effects of WTO on Structural Change in Dairy Policy and Industry Structure

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  1. The Potential Effects of WTO on Structural Change in Dairy Policy and Industry Structure James F. Oehmke Al Mussel Christopher A. Wolf November 15-16, 2007 Holiday Inn Capitol/American Farm Bureau Federation Washington, DC

  2. Issue • Issue: Recent changes in trade patterns • Engineered dairy products • WTO modalities • Who Will Gain, Who Will Lose?

  3. Canadian Dairy Policy • Domestic Quotas (Cannot export to US per 2003 agreement, but some dairies still operate outside the domestic system, NY seeks enforcement 11/13/2007) • Tariff Barriers to Trade • Price Determination • Additional Support to Farmers

  4. P PW(1+248%) Canadian price under projected WTO modalities, dairy remains a sensitive product PW(1+100%) PB PW Q QA QB

  5. Increasing Canadian Imports of Milk Protein Isolates

  6. Changing Composition of US Dairy Imports Figure 2a, composition of US dairy imports, 2001. Source: USDA/FATUS Figure 2b, composition of US dairy imports, 2006. Source: USDA/FATUS

  7. Value of US dairy imports by origin, 2006 ($1,000).

  8. P PW(1+248%) Canadian price under projected WTO modalities, dairy remains a sensitive product PW(1+100%) PB PW Q QA QB

  9. WTO Modalities • Reduction in Tariffs of ~2/3 • Sensitive Products: 4-6% or existing tariff lines • Can avoid 1/3 of reduction by increasing TRQ 3 % points • Can avoid 2/3 of reduction by increasing TRQ 6 % • May still face cap of 75-100% • Subsidy reductions

  10. P PW(1+248%) Canadian price under projected WTO modalities, dairy remains a sensitive product PW(1+100%) PB PW Q QA QB

  11. Questions: • How will Canada respond to increasing international competition? • What will be the effects on the Canadian dairy industry? • Are there opportunities for US exports to Canada? • [We ignore New Zealand] • [We focus on WTO modalities] • [Canadian dairy farmers claim higher supply curve]

  12. P Potential increase in quantity consumed under modalities text tariff reductions PW(1+248%) Canadian price under projected WTO modalities, dairy remains a sensitive product PW(1+100%) PW Q QA QC

  13. Table . Projected milk demand by class under a selected WTO modality.

  14. Projected Changes in Quantities of Canadian Milk Demand, Class 1-4, Current and Various WTO Modalities

  15. Canadian Responses • Try to preserve current quota system (official stance of Ministry of Agriculture) • Become more competitive by growing size of dairies (modifying quota system required) • Become more competitive by becoming more efficient (modifying quota system helps)

  16. Preserving Quota at Current Amounts • Allows global competitors to grab any increase in quantity demanded. • Under WTO modalities could be as much as 7.1 million hl of increased in Qd, + TRQ • Increased Ontario production + TRQ ~ 10% of Michigan production. • Increased Quebec production + TRQ ~6% of NY production. Most processing in Quebec • NY and Michigan would likely see large benefits from preserving the existing quota system.

  17. Canadian Dairy: Becoming Competitive by Growing Herd Size

  18. Canadian Dairy: Becoming Competitive by Growing Herd Size • Increase in milk demand is small—on the order of 10% or less • Data and most econometric estimates support IRS, but cost savings proportionately less than herd size increase (Elasticity < 1). • By itself, not a meaningful way to become competitive.

  19. Changes in Michigan Dairy Herd Size

  20. Changing Size of Canadian Dairy Farms

  21. Expense-to-receipts ratios by farm type, Canada

  22. Canada: Becoming Competitive by Becoming Efficient • Ontario data are not available, but anecdotal evidence suggests that a significant proportion have stanchion/tie stall barns • 100% of Michigan dairy farms 80+ are free stall and 100% of farms 120+ have milking parlors

  23. Canada: Becoming Competitive by Becoming Efficient • Econometric estimates suggest inefficiencies of 60% are more are common in Canadian dairy

  24. Conclusions • Global competition and/or WTO will change effect of Canadian policy and structure of Canadian dairy. • This restructuring represents a significant market opportunity for border states • Canadian dairy could maintain profitability amid lower prices and meet increased demand by increasing efficiency through investment in new technology (but not easy to do).

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